Blockchain and Cryptocurrency Beginner - About Delegated Proof of Stake (DPoS) and Impermanent Loss in DeFi

When it comes to blockchain technology, there are different consensus algorithms used to validate transactions and create new block on the network. As we already know, bitcoin blockchain is the first blockchain and cryptocurrency that made use of a consensus algorithm known as proof of work consensus algorithm where miners make use of high-end computers with high processing power and high power consumption to solve complex mathematical puzzles on the network in order to create new block and validate transactions on the network and at the same time, mine new coins.

The delegated proof of stake (DPoS) consensus algorithm works differently from the proof of work of bitcoin. It is a consensus algorithm that was developed in 2014 by Dan Larimer who is an American cryptocurrency entrepreneur and software developer. The delegated proof of stake (DPoS) consensus algorithm works using an election process in which the cryptocurrency holders vote for delegates to be responsible for validating new blocks and transactions on the network. Example of blockchain projects that make use of the delegated proof of stake (DPoS) consensus algorithm are Steem blockchain, EOS, Tron etc.

The delegated proof of stake (DPoS) consensus algorithm is seen to have a lot of benefits as compared to the regular Proof of stake (PoS) consensus algorithm and is seen by many to be more efficient consensus algorithm than the proof of stake. Both the delegated proof of stake (DPoS) consensus algorithm and the proof of stake consensus algorithm was created as an alternative to the proof of work consensus algorithm of bitcoin which was more energy intensive and power consuming.

The delegated proof of stake (DPoS) consensus algorithm works like a digital democracy in which the delegates who were voted by stake holders, reach consensus or agreement in order to validate new blocks ad transactions on the network. Each DPos blockchain have their own rules, however, a fixed number of delegates or witnesses which ranges from 21-101 who were voted by the stake holders of the network, validate transactions on the network and are rewarded for adding new blocks on the blockchain. Each stake holder can be able to vote proportionally based on the number of coins they hold. In DPoS, a stake holder can delegate their stake to another stake holder on the network who will vote on their behalf. When it comes to producing new blocks,delegates take turns and produce new blocks every few seconds. Some DPoS require the delegates to also have a stake on the network as commitment. The delegated proof of stake (DPoS) consensus algorithm offers high performance and more energy efficient.

What is Impermanent Loss?

DeFi has been one of the hot topics and has been on a massive rise in recent times. Giving users full control of their funds and also allowing users to exchange in a fully decentralized and peer-to-peer way. DEXs like Uniswap, Pancakeswap have gained massive popularity and user base. In the world of DeFi (Decentralized Finance), the term Impermanent Loss is quite common and a lot of people have experienced it at some point, especially those who provide liquidity on decentralized exchanged DEX.

When we talk of Impermanent Loss, it is mostly common to liquidity providers. We all know that DEXs like Uniswap, Pancakeswap allows users to become liquidity providers and earn rewards from fees. Impermanent Loss basically occurs when a liquidity provider adds liquidity in the liquidity pool and the price of the added assets changes compared to when the asset was added into the liquidity pool. When the change is high, there is a high chance that the liquidity provider would have impermanent loss. What this means is that the value of the asset will have a lesser value in dollars after withdrawing than when it was added.

Conclusion

Staking is one of the many ways in which anyone can earn passive income just by staking their assets and earn yearly yields based on the percentage APY offered by the staking platform. It has become very popular in the crypto space as more and more platforms and exchanges have staking features which allows users to stake their assets and end interest rewards. The delegated proof of stake consensus algorithm is one of the very popular consensus algorithms and is seen to have a lot of benefits as compared to the regular Proof of stake consensus algorithm and is seen by many to be more efficient consensus algorithm than the proof of stake. Both the delegated proof of stake consensus algorithm and the proof of stake consensus algorithm was created as an alternative to the proof of work consensus algorithm of bitcoin which was more energy intensive and power consuming.